New Guidelines Announced for Direct Selling Business

The model guidelines impose strict responsibility on direct selling entities for preserving the rights of consumers

The government has issued new guidelines to regulate the direct selling industry and protect rights of customers. These guidelines will impact companies like Amway, Oriflame, Tupperware, Avon and others pursing similar business models. The ‘Direct Selling Guidelines 2016’ framework was released by the Consumer Affairs Minister Ram Vilas Paswan recently, and has been sent to the states and union territories for adoption.

The guidelines have been framed with the view to protect consumers from fraud. The government also wants to make it mandatory for e-retailers and online marketplaces to get prior written consent of direct selling entities before soliciting sales. The guidelines also seek to define direct selling and direct sellers, as well as pyramid schemes involving chain of subscribers wherein a buyer enrolls one or more subscribers and the chain continues.

The norms require direct selling companies to set up a grievance redressal committee to attend to consumer complaints. The complaints will have to bear a unique number through which they can be tracked. Besides, the firms will also have to provide the name of purchaser and seller, delivery date, procedure of returning goods and warranty.

The new guidelines have come in response to representations made by the direct selling industry, which has been asking for clear guidelines and removal of legal ambiguities in order to differentiate between fraudulent ponzi schemes and genuine businesses run by them. A FICCI-KPMG report states that direct selling in India will grow more than 800% in volume to reach `64,500 crore by 2025, from the current `8,000 crore.

The process for framing guidelines was started in 2013 by the government, following the arrest of then Amway’s India chairman William S Pinckney and two company directors over allegations of fraud in Kerala, under the Prize Chits and Money Circulation Schemes (Banning) Act.

The Ministry of Consumer Affairs has issued these guidelines for states to regulate direct selling and multi-level marketing (MLM), which prohibit pyramid schemes as well as money circulation schemes under the garb of direct selling business. The government has defined legitimate direct selling and differentiates it from pyramid and money circulation schemes, to help investigating agencies identify fraudulent players.

“We are sending the model guidelines to all state governments. States can make some changes as per their localised requirements. The guidelines were necessary for better growth in the direct selling business,” says Consumer Affairs Secretary Hem Pande. He adds that the guidelines are optional and it is not mandatory for the states to adopt them.

As per the guidelines, direct selling has been defined as ‘marketing, distribution and sale of goods or providing of services as a part of network of direct selling other than under a pyramid scheme’.
Pyramid scheme means ‘a multi layered network of subscribers to a scheme formed by subscribers enrolling one or more subscribers in order to receive any benefit, directly or indirectly, as a result of enrolment or action or performance of additional subscribers to the scheme’.

Money Circulation Scheme has the same meaning as defined under Prize Chits and Money Circulation Schemes (Banning) Act.

The guidelines, that prohibit pyramid and money circulation schemes, state, “No person or entity shall promote a pyramid scheme as defined in Clause 1 (11) or enroll any such person to scheme or participate in such arrangement in any manner whatsoever in the garb of direct selling business.”

Many conditions have been prescribed for conducting direct selling business. They bar direct selling companies from charging any entry fee from agents, or compelling them to buy back unsold stocks. These entities will have to enter into an agreement with direct sellers or agents, and give full refund or buy-back guarantee for goods and services sold to them.

The norms have laid down remuneration system for persons engaged by direct selling firms on sharing of incentives, profit and commission.

The guidelines have also made provision for appointment of a monitoring authority at both central and state levels to deal with issues related to direct selling. Besides, they prohibit direct selling firms from using misleading, deceptive or unfair recruitment practices.

A direct selling entity should not ask direct sellers ‘to provide any benefit including entry fees and renewable fees or to purchase any sales demonstration equipment or material in order to participate in direct selling operations’. The guidelines have also put conditions for contract between direct sellers and direct selling entity, saying that all such agreements should be in writing. The agreement should not compel or induce the direct seller to purchase goods or services in an amount that exceeds an amount that can be expected to be sold to consumers within a reasonable period of time. The contract should provide direct sellers a ‘reasonable cooling-off period’ in which they can cancel and receive a refund for goods and services purchased. The guidelines have also specified certain obligations of direct sellers, such as full disclosure of the goods and services offered by direct selling entities. The direct selling entity will be liable for grievances arising out of sale of products, services or business opportunity by its direct sellers.

Direct selling entities have been asked to comply with these guidelines within 90 days and submit an undertaking to the Department of Consumer Affairs in this regard.

The industry has welcomed the move, saying that it will bring clarity in the Rs 7,500-crore sector and end regulatory conflicts, leading to future growth in the direct selling segment. Indian Direct Selling Association (IDSA) president Jitendra Jagota has said, “In the absence of proper policy or guidelines, numerous fraudulent players have been taking advantage of the situation. Now that the guidelines are out, they shall address the current concerns of the industry and provide much needed impetus.”